Last year African frontier stock markets on the dollar-denominated MSCI benchmark index, where the majority reside, were an overall losing proposition – with the region sub-index the only decliner at 7% versus the composite up by the same percentage.

Central Europe at +30% was the gauge runaway winner, while Gulf members with a flat result were the closest to negative. Egypt and South Africa are represented on the core tier, and the former was a rare exception with a 35% gain in USD alongside 70% in local currency terms, while the respective numbers for the latter were -2% and +5%.

At the opposite end was Nigeria, down 28% but ahead 45% on its local index, and Kenya at the very bottom at -50%, with non-resident net selling four years in a row. Most exchanges were in the grip of exchange rate weakness, stagflation, sovereign debt trouble, and election cycle drags that will linger into 2024, but may not be as much a stumbling block as equities offer straightforward returns and relative protection from these woes for domestic and foreign investors alike accustomed to shunning the asset class.

South Africa’s rand as an FX proxy for all emerging markets fell 10% against the dollar, and blue-chip stocks were hammered by the endless budget battle over support for state power company Eskom and transport/logistics provider Transnet heading into an election year where the ruling Africa National Congress (ANC) party is in its worst shape since independence. The business and financial community literally took flight via the exchange on barely positive growth, debt/GDP at 75%, and official 30% unemployment, with a record twenty companies delisting. Sophisticated retail and institutional investors were drawn to the certain payback of inflation linked bonds yielding 4% in real terms, only trailing Brazil in the emerging markets universe.

Egypt was Africa’s champ on an unwavering trajectory since early in 2023, driven by domestic buyers trying to hedge 35% inflation and official 20% pound depreciation, with a further devaluation postponed for elections and review of the International Monetary Fund’s initial $3 billion program. Privatization was a limited driver with a few state company stake sales through the exchange to reach the Fund’s mid-year $2bn target, as fixed income allocators were drawn to equities as they turned wary with debt/GDP at 95%, the highest among mainstream emerging markets. The external pile alone is $150bn and for months the sovereign bond index spread was above the distressed 1000 basis point level on default fears. Gold as a traditional safe haven also rose double digits, but physical supply was hampered by import backup with central bank FX reserves at $35bn, half Gulf ally temporary deposits.

In the fourth quarter, the Israel-Hamas war coincided with rally around the flag sentiment for President Abdul Fattah Al-Sisi’s third term re-election, and potential international community support through debt relief and expanded IMF credit to forestall a cross-border refugee disaster. Egypt’s sovereign bond spread shrank to 900 basis points as the EU talked up billions in migration aid and the Fund doubling its engagement. January will test whether these promises come to fruition, but market consensus has long passed that another devaluation is inevitable to the 40-45/$ range, with the parallel rate already in the mid-50s. After this step, Western investors may again dip their toes, but they will take a cue also from the disposition of EGP500mn in state bank special yield 25% certificates of deposit that expire this month. Full rollover is unlikely unless rates are raised dramatically, with a large inflow expected to accelerate equity momentum.

Alongside Gaza spillover worries, geopolitics looms large with other neighbours to constitute humanitarian and security drags. Cairo remains in a fight with Ethiopia over filling an upper Nile Dam allegedly choking its water source, with UN intervention unavailing. Libya is still in an East-West split after epic flooding that displaced tens of thousands and brought meagre donor cleanup pledges. Sudan’s nine-month civil war has triggered 1.5mn refugees, around one-quarter into Egypt where the 5% budget deficit allows scant room for additional social spending. Banks and construction firms have a major presence in Khartoum, where an estimated 90% of money is now outside the collapsed formal financial system.

Nigeria will be demoted to a stand-alone frontier market in the first quarter after MSCI’s review of the chronic FX crunch, after the country was previously removed from JP Morgan’s local bond index. The naira depreciated the most in Africa, 50% against the dollar for the year, as President Bola Tinubu began to unwind the multiple tier exchange rate regime upon taking office. Banks jumped 100% on the local index as the central bank ordered recapitalization in 2024, ushering in a likely merger wave. The benchmark interest rate continues to lag 25% inflation, as $8bn in government borrowing from the monetary authority to cover the chronic 3% budget deficit was converted into a long-term bond. Foreign capital remains skittish as big consumer multinationals have pulled out from the stock exchange, and Q3’s $600mn inflow was half preceding quarters. FX reserves fell 5% annually to $32bn on flailing oil exports, while $20bn in remittances now places the country in the top ten globally from the former leading five. As an equity play, it is the dominant fintech/digital payments hub on the continent in part by virtue of population, but also from distrust in regular financial intermediation as physical banknotes were again in short supply at year end.

Morocco was the leader in the frontier pack with a near 20% gain, as the dirham broke the currency mould up 1.5% against the dollar in a closely managed basket peg. The earthquake invited a 5-year, $5bn rebuilding effort mostly from internal resources, as a World Bank designed catastrophe bond paid out $275mn to defray immediate costs, including direct budget transfers to displaced households. Hosting the IMF annual meeting in Marrakesh brought attention on burgeoning status as a green energy and global auto assembly hub, while listed state phosphate giant OCP and banks sport an impressive regional footprint. Remittances increased 5% on an annual basis through November, with inflation at 6%. Drought still affects hydropower capacity with water levels at record lows, capping economic growth below 3%. The central bank’s benchmark rate at 3% remains below the ECB’s, but capital has stayed at home buoyed by new commercial relationships as with Israel under the Abraham Accords before the Hamas war outbreak.

Lesser-known Senegal also rose 20% moving into the February elections, with opposition leader Ousmane Sonko still attempting to get on the ballot after a sex offence conviction to face President Macky Sall’s designated successor, his current Prime Minister Amadou Ba. A new IMF arrangement and natural gas exports to Europe are in hand for the next government. Cote d’Ivoire’s local gauge jumped 10% in dollar terms, with 6% growth again leading the West Africa CFA Franc zone on expanding oil production. Candidates are lining up in preparation for 2025 elections, with ex-Credit Suisse chief executive and Planning Minister Tidjane Thiam throwing his hat in the ring. Mauritius finished the year +4% with the rupee flat versus the dollar, as it joined an AU-sponsored Pan-African cross-trading initiative amid solid showings in tourism and offshore financial services.

In the negative column for the year, Zimbabwe (-20%) remains a foreign investor pariah after Old Mutual was suspended for alleged currency manipulation, and President Emmerson Mnangagwa’s disputed re-election offers scant glimmer of economic policy turnaround from commodity rent-seeking now from lithium endowment with China partners. Ghana was off 6% in dollars with the cedi’s 15% depreciation, and banks did even worse (-7.5%) after the IMF program’s domestic debt swap forced large haircuts. Consumer goods shares in contrast enjoyed double-digit gains, and exporters benefited on a $1 billion current account surplus.

Kenya was the biggest letdown although the first IPO in a decade is in view, offsetting lackluster results from a handful of blue chips like Safaricom entangled in a messy Ethiopia launch. Banks’ bad loan ratio is 15%, and T-bill yields doubled to 16% to divert cash. The $2bn sovereign bond spread retrenched from danger after the IMF and other official lenders boosted support, but a mooted buyback quashed fund manager sentiment. For the main African markets in 2024, this mixed feeling rather than hardcore gloom over growth and fiscal-monetary policy trends should prevail to encourage an across-the-board equity upswing.

–  Gary Kleiman, senior partner, Kleiman International Consultants, Inc.